Mortgages explained

What is a mortgage?

A mortgage is a loan you use to buy a property, secured against the home itself. "Secured" means the lender can repossess and sell your home if you don't keep up the repayments, that's what makes a mortgage different from an unsecured loan. It's usually offered by a bank or building society. Whether you're a first-time buyer, moving home, or looking to remortgage, our broker partner Mojo Mortgages can help you find a mortgage deal that suits your needs.

What's a simple definition of a mortgage?

A mortgage is money you borrow from a bank or building society to buy a home, which you pay back with interest over an agreed number of years.

Does "mortgage" mean loan?

Yes, a mortgage is a specific type of loan. What makes it a mortgage rather than any other loan is that it's secured against the property you're buying.

Where does the word "mortgage" come from?

It comes from Old French, roughly translating to "dead pledge", the pledge (loan) "dies" either when the debt is paid off or when the property is repossessed. It has nothing to do with mortality; it's just the origin of the term.

What’s the difference between a mortgage and a loan?

A mortgage is a loan, but not every loan is a mortgage. The key difference is that a mortgage is a secured loan tied to your property. Other loans, like personal loans or credit cards, are usually unsecured and don't require collateral.

Unsecured loans usually come with higher interest rates and lower borrowing limits.

How does a mortgage work?

When you take out a mortgage, you agree to repay the money you’ve borrowed — plus interest — in monthly instalments over a set period. In the UK, mortgage terms are typically around 25 years, but you can find both shorter or longer options.

Until your mortgage is paid off in full, the lender technically owns part of your home. Mortgages can be taken out individually or as a joint application.

You can get a mortgage on your own or take out a joint mortgage with one or more people.

How to get a mortgage

If you're ready to buy a home, getting a mortgage is one of the biggest steps, but it doesn’t have to be overwhelming.

You can get a mortgage in one of two ways:

• Direct from a lender – This means applying straight to a bank or building society. You’ll need to do your own research and choose from that lender’s range of mortgage deals.

• Through a mortgage broker – A broker can search deals from across the market, including some you might not find yourself. They’ll also help with the paperwork and offer personalised advice based on your circumstances.

We work with Mojo Mortgages, who offer free advice from qualified mortgage experts. They search deals from 60+ lenders, so you can be confident you’re seeing a wide range of options, all in one place.

What is the mortgage process?

Once you have a mortgage in principle and you’re ready to apply for your mortgage in full, you’ll need to take the steps below:

• Get your documents ready, including your ID (such as a passport), your proof of address (such as a utility bill), proof of income (at least three months’ payslips and your P60), and proof of deposit. If you’re self-employed, you will usually need the last two to three years’ worth of accounts. 

• Complete your mortgage application. You will need to give your lender details of the property you want to buy, including the price you’ve agreed to pay.

• Appoint a solicitor to draw up the contracts and handle searches.

• Get a home survey. This needs to be carried out on the property you’re buying to check its value and condition. You can choose whether you want a more basic condition report, a more comprehensive homebuyer report or a full structural survey to give more detailed information about the property’s condition.

• Exchange contracts. Once your mortgage is approved and you’re ready to make your purchase, your solicitor will exchange contracts of the sale with the seller’s solicitor.

• The next step is completion. This is the date the money is transferred to the seller and you legally own your new home and can move in.

Here is our complete guide on how to get a mortgage.

How do mortgage deposits work?

Your mortgage deposit is the upfront amount you put towards buying a home. The rest is covered by the mortgage loan.

For example:

• Property price: £200,000

• 10% deposit: £20,000

• Mortgage amount: £180,000

This means your Loan-to-Value (LTV) is 90%. A higher deposit usually gives you access to lower mortgage rates.

How much does a mortgage cost?

The costs of a mortgage depends on:

• The price of the property

• The size of your deposit and the resulting mortgage amount

• The interest rate on your deal

• The length of your mortgage term

A lower interest rate or a shorter term generally means less interest paid overall, but shorter terms mean higher monthly repayments. You could use our mortgage calculator to see what a specific rate and term would mean for your own numbers.

For example, if you borrow £200,000 over 25 years with an interest rate of 4%, you’d repay a total of £316,702. That’s £116,702 in interest on top of the amount you borrowed.

That would mean monthly payments of about £1,056 at a 4% interest rate or £1,289 at a 5% interest rate.

You'll also need to factor in mortgage fees such as:

• Product fees are charged for taking out the mortgage

• Application fees can be charged when you apply for a mortgage, whether you end up taking it out or not

• Valuation fees may be charged by your lender for working out how much your property is worth

• Higher lending charges come with some mortgages if you have a small deposit

• Telegraphic transfer fees are charged when the bank transfers the money they are lending to you (usually to your solicitor)

• Broker fees can be charged if you take out a mortgage recommended by a broker, but our partner mortgage broker Mojo Mortgages doesn't charge a fee.

You may also have to pay fees on your old mortgage:

• Early repayments charges if you pay it off before the end of its term

• Exit fees are charged on some mortgages when you move to a new lender

What happens if you miss mortgage repayments?

If you miss a monthly repayment you will likely be charged a late payment fee by your lender. On top of this, the missed payment(s) will be reported to the credit reference agencies and this could have a negative impact on your credit score.

If you think you might miss a monthly repayment, or you already have, it’s crucial that you speak to your lender as soon as possible. They will work with you to find a solution to help you get back on track, whether that’s offering you a payment deferral for a short time, a period of reduced payments or an extension to your mortgage term. 

Whatever you do, don’t bury your head in the sand – talk to your lender straightaway. 

What type of mortgage do I need?

There are different types of mortgages, depending on your situation:

First-time buyer mortgages

First-time buyer mortgages are esigned to help people get on the property ladder, even with smaller deposits. You might also be eligible for government schemes like:

• Help to Buy – government equity loans for new builds only available in Wales

• Right to Buy – discounts for council tenants buying their homes

• Guarantor mortgages – a family member helps guarantee the loan and step in if you miss any payments

Other types of mortgage

• Bad credit mortgages – for those with a poor credit history

• 100% mortgages – rare, but possible with a guarantor

• Self-employed mortgages – if your income isn’t straightforward

• Commercial mortgages – for buying business premises

• Mortgages for older borrowers – options if you're over typical lending ages

Mortgages for specific purposes

• Buy-to-let mortgages – for renting out property

• Second home mortgages – for holiday homes or investments

• Equity release / lifetime mortgages – for unlocking cash from your home

• Bridging loans – short-term borrowing, usually between home sales
  

What are interest only and repayment mortgages?

Most mortgages are repayment mortgages. Your monthly payments will go towards both the interest charged on your mortgage and clearing the outstanding balance. By the end of the mortgage term, you will have paid off the full amount borrowed.

If you get an interest-only mortgage, your monthly repayments only cover the interest owed, so your balance will not go down. At the end of the term, you will need to pay off the full balance. This means you will need to have saved up this amount separately using a repayment vehicle like savings, shares, an ISA or other investment.

What is the difference between interest only and repayment mortgages?

Should I get a fixed or variable mortgage?

Variable mortgage rates can change at any point, and usually rise and fall roughly in line with the Bank of England base rate.

Fixed rate mortgages guarantee that the interest rate won't change for a set period, usually between one and five years.

Tracker mortgages have variable rates that follow the Bank of England base rate exactly, staying a set amount above it - so if the base rate goes up, your rate goes up by the same amount, and vice versa.

Discount mortgages offer a rate set below the lender's standard variable rate, usually by a percentage the lender fixes for a set period of a year or more. The rate still rises and falls with the lender's standard variable rate.

Should you get a fixed, variable or tracker mortgage?

Will I be accepted for a mortgage?

Mortgage lenders have different standards and requirements. The following factors will affect whether lenders will offer you a mortgage and how much they will be willing to lend to you:

• The value of the property

• Your deposit

• Your age

• The length of the mortgage term

• Your credit record

• Your income

• If you are applying solely or jointly
  

How to manage your new mortgage

Once you move into your new home you will need to start making monthly repayments on your mortgage. If you miss any payments, the amount you owe could increase and your credit record could be damaged. If you fall too far behind your lender could repossess your house.

If you set up a direct debit to pay your mortgage, you will never miss a payment as long as there is enough money in your bank account.

How to keep affording your mortgage

Aim to have six months’ worth of mortgage payments, as well as basic household expenses – such as bills and food - set aside in a savings account that can be accessed in an emergency.

Even having a couple of months’ worth of expenses in savings can give you breathing space in case you lose your job or your circumstances change.